General-merchandise discounter Fred's (NASDAQ:FRED) will report its fourth-quarter 2006 financial results on Thursday. How will it do now that the initial post-hurricane recovery period has passed?

What analysts say:

  • Buy, sell, or waffle? Twelve analysts have weighed the value of Fred's, and eight say "hold," three think it's worthy of a buy, and one dour fellow says "sell."
  • Revenues. Sales are expected to rise 15% to $526 million.
  • Earnings. Profits, on the other hand, are expected to rise 8% to $0.26 per share.

What management says:
Fred's has had a dickens of a time trying to estimate its sales after the impact of the hurricanes of 2005. The devastation created a mini-boom for retailers in the aftermath; people needed to replenish lost goods, and the federal government poured relief funds into the region to assist them. For Fred's in 2006, that meant going up against comparable sales that were tough to predict, and last quarter, it widely missed analyst expectations. October had interrupted eight consecutive quarters of sales growth, and CEO Michael Hayes says he "remain(s) cautious about the competitive environment and the absence of the relief funds that benefited the fourth quarter of 2005."

What management does:
Through a combination of limiting markdowns and controlling shrinkage (read: "shoplifting"), Fred's has been able to maintain its margins even as sales faltered last quarter. It saw its operating expenses increase just slightly as it brought in new inventory for the holiday season, and the fourth quarter might bring some new pressures, as it planned to open 12 new stores and eight pharmacies.

Margin

10/05

01/06

04/06

07/06

10/06

Gross

28.2%

28.2%

28.3%

28.3%

28.4%

Operating

2.5%

2.5%

2.5%

2.6%

2.5%

Net

1.7%

1.6%

1.6%

1.7%

1.6%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
The discount retailer hasn't had much luck in predicting a normalized stream of revenues following the relief efforts. It realized that its performance on a year-over-year basis could not match results born from an influx of money into the region. Since its operations are concentrated in the Southeast, it feels far more of the impact of such fluctuations in demand than would Dollar Tree (NASDAQ:DLTR) or Family Dollar.

The deep-discount market in which Fred's operates has been getting mixed signals. Where Dollar General (NYSE:DG) discounted itself enough through recent performance that it attracted private-equity firm Kohlberg Kravis Roberts to make a buyout offer, Big Lots has been resplendent in its recovery.

Yet because of its spotty record in recent quarters, Fred's now trades at a slight discount to the industry. One would expect that much of the markdown would already be priced into Fred's stock, and any bit of positive news would give it a lift.

Related Foolishness:

Fred's has earned a two-star rating from Motley Fool CAPS, the Fool's new investor-intelligence community. You can add your voice to the new stock rating service by joining today. It's free!

Dollar Tree is a former recommendation of Motley Fool Inside Value. A 30-day trial subscription gives you the inside scoop on all the value stocks the market has to offer.

Family Dollar is a Motley Fool Stock Advisor selection.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.